Virtually anyone who goes into business with one or more partners does so because those partners bring something to the table – often expertise, experience, or creativity. What happens, however, if a partner dies, divorces, files for bankruptcy, or simply wants to sell his or her share in the business? The other owners may be surprised to learn that they would suddenly be in business with their partner’s spouse, heir, or even a complete stranger who lack the qualities that were sought from the original partner, but can nonetheless make decisions on behalf of the business. In most cases, business owners can prevent these unanticipated transfers if they plan ahead.
Owners of New York limited liability companies (called “members”) can draft provisions in their company’s Operating Agreement that restrict ownership transfers. The Operating Agreement may also trigger an automatic sale of the ownership, or even a company dissolution, upon an unauthorized transfer. Members can opt to use other mechanisms such as “rights of first refusal” which give the other members, or even the company itself, the right to purchase ownership interest if a member wishes to transfer ownership to another party.
Shareholders of a closely held corporation can create similar mechanisms to those available to LLCs. Shareholder Agreements, unlike LLC Operating Agreements, are not mandated by New York law, but are nonetheless binding with few exceptions. Corporations can use Shareholder Agreements to require shareholders to vote a certain way; thus any unexpected transferees, such as a spouse or heir, would have less of an impact on corporate governance as their votes are bound to be cast in accordance with the agreement.
Business owners may wish to review their company’s documents and plan appropriate procedures for partners who transfer their ownership. It is typically far easier to lay out these procedures in advance than to dispute the transfer after it has already occurred.